V.F. Corporation — FY2010 Form 10-K
Business context and reporting period. VF is a global branded apparel and footwear company with businesses reported in five coalitions: Outdoor & Action Sports, Jeanswear, Imagewear, Sportswear and Contemporary Brands. The fiscal year ended January 1, 2011, and covered 52 weeks; comparisons are with the 52-week fiscal year ended January 2, 2010. VF generated 30% of revenue internationally and 18% through its own stores and e-commerce.
Financial performance and position
| Metric | FY2010 | FY2009 |
|---|---|---|
| Total revenue | $7.703 billion | $7.220 billion |
| Operating income, reported | $820.9 million | $736.8 million |
| Net income attributable to VF | $571.4 million | $461.3 million |
| Diluted EPS | $5.18 | $4.13 |
| Cash provided by operations | $1.001 billion | $973.5 million |
| Cash and equivalents, year-end | $792.2 million | $731.5 million |
| Long-term debt, year-end | $935.9 million | $938.5 million |
- Revenue rose 7%; organic growth was $463 million, partly offset by a $21 million foreign-currency translation headwind. Gross margin reached a reported record 46.7%, versus 44.3%.
- Reported operating margin was 10.7%. A $201.7 million noncash goodwill and trademark impairment charge reduced operating income and diluted EPS by about $1.29 per share. Excluding the charge, operating income was approximately $1.023 billion and diluted EPS was $6.46; these are non-GAAP measures.
- Capital expenditures were $111.6 million. Operating cash flow less capital expenditures was approximately $889.6 million. VF also spent $411.8 million on share repurchases, paid $264.3 million in dividends, and repaid $203.1 million of long-term debt.
- Year-end working capital was approximately $1.717 billion, the current ratio was 2.5, and debt-to-total-capital was 20.2%. Net debt-to-total-capital was 4.5%. Domestic and international revolving credit facilities provided about $1.3 billion of available capacity; ratings were investment grade with stable outlooks.
- Coalition revenue/profit: Outdoor & Action Sports $3.205 billion/$642.4 million; Jeanswear $2.538 billion/$431.9 million; Imagewear $909.4 million/$111.2 million; Sportswear $497.8 million/$52.4 million; Contemporary Brands $438.7 million/$14.0 million. Coalition profit excludes corporate costs, interest and impairment charges.
Material changes versus prior year
- Outdoor & Action Sports led growth: revenue increased 14% and coalition profit 30%; The North Face and Vans revenues rose 18% and 20%, respectively. Asia revenue increased 31%.
- Jeanswear revenue was nearly flat, while coalition profit increased 16.5%, supported by lower product costs and improved margins. International Jeanswear revenue declined 3%, despite 36% growth in Asia.
- Imagewear revenue increased 5% and profit 27% as industrial and protective-apparel demand improved. Sportswear revenue was flat; Kipling growth offset lower Nautica sales.
- Contemporary Brands revenue increased 5%, but coalition profit fell 72% to $14.0 million. The premium denim market remained weak; store and marketing investments, excess-inventory costs and other factors weighed on results.
- Reported net income and EPS improved from 2009, which also included a $122.0 million impairment charge. Excluding impairment charges in both years, diluted EPS rose to $6.46 from $5.16.
Outlook, commentary and risks
- Management planned continued elevated investment in advertising and product development in 2011, approximately 100 new retail locations, and capital spending of up to $225 million. Retail capital investments were expected to be approximately $85 million, focused on selected brands and international markets.
- Management cited cotton and other input-cost inflation as a potential 2011 supply-chain challenge. Inventories were up 12% year over year, reflecting anticipated growth, rising costs and earlier fabric purchases.
- Key risks include weak consumer spending, fashion and demand forecasting, pricing and margin pressure, reliance on major retail customers (top ten were 26% of revenue; Wal-Mart alone 10%), foreign exchange, sourcing and supply-chain disruption, and competition.
- Goodwill and intangible assets totaled approximately $2.66 billion, or 41% of assets. The 2010 impairment related to 7 For All Mankind; management cautioned that future impairments could occur if performance or valuation assumptions weaken.
- Defined-benefit pension plans were underfunded by $207.4 million at year-end, with 85% funded status. Management did not intend to contribute to the domestic qualified plan in 2011, but expected approximately $11 million of contributions to other plans; future funding needs remain sensitive to returns and discount rates.
- VF agreed to acquire Rock & Republic trademarks and related intellectual property for approximately $57 million, subject to customary conditions and bankruptcy-court confirmation. The filing reported no pending material legal proceedings outside routine litigation.
- The indicated annual dividend rate for 2011 was $2.52 per share. Management also intended to repurchase at least 1.0 million shares in 2011, subject to capital needs and market conditions.
Investor verification priorities
- Reconcile reported results with the non-GAAP figures excluding the $201.7 million impairment, and review the assumptions underlying the 7 For All Mankind valuation.
- Track 2011 revenue, margins and inventory levels, particularly the effects of cotton costs, pricing, and the premium denim market.
- Verify that planned store openings and increased capital spending generate the expected returns and do not weaken liquidity.
- Monitor pension funding, investment performance and discount-rate sensitivity, as well as any required future contributions.
- Review execution of the Rock & Republic transaction, share repurchases and dividend plans alongside acquisition and investment needs.